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Gothic Construction Group, Inc. v. Port Authority Trans-Hudson Corp.

312 N.J. Super. 1, 711 A.2d 312 (App. Div. 1998)

CONTRACTS; ARBITRATION—Even though a party agreed to a contract which, pursuant to the bid specifications, contained an arbitration clause that appointed an employee of the other party as arbitrator, the clause was found to be unenforceable as a contract of adhesion and with a clear conflict of interest.

A contract between a general contractor and the Port Authority Trans-Hudson Corporation (PATH) containing an arbitration provision was terminated by PATH based upon an alleged breach by the contractor. The contractor filed suit and PATH moved for summary judgment, which the trial judge granted.

On appeal, PATH argued that the contractor failed to first attempt to resolve the dispute through arbitration prior to suit, as required by the contract. The contractor argued that the arbitration clause was unenforceable because it designated PATH’s chief engineer, the person who terminated the contractor in the first place, as the arbitrator. The Appellate Division found that the contractual clause did in fact require binding arbitration as a precondition to the filing of a suit and that it appointed the drafter of the contract as arbitrator. Although arbitration is generally favored by the courts, an arbitration decision can be vacated if there is corruption, fraud, partiality, or misconduct. The Appellate Division cited decisions in which arbitration clauses were deemed contracts of adhesion and were held to be void and unenforceable as against public policy because of the partiality of the arbitrator. In one of those cases, the mere appearance of bias was considered enough to strike the arbitration clause from the contract. In this case, the Appellate Division found that the contract was one of adhesion because it was procured through the bidding process, giving the contractor no say as to its provisions. The Court also found a clear conflict of interest in having PATH’s chief engineer act as arbitrator, in effect deciding whether his own decision to terminate the contract was justified. Because of the lack of bargaining power and conflict of interest, the Appellate Division refused to agree with PATH that the arbitration clause was enforceable simply because the contractor signed the contract. The Court also felt that the contractor’s claims should not have been dismissed on summary judgment because the issue of arbitrator bias was not properly resolved. The Appellate Division reversed the summary judgment decision and remanded for further proceedings.


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